It's hard to believe, but it is almost tax time ladies and gents. In preparation for that, we are going to touch on a new subject to consider, starting with your tax filing this year. Trivia question: Do you have to report the sale of your personal residence on your tax return (even though any gain from the sale of your personal residence is tax free)? If you answered yes, you would be right! Prior to this year you didn’t need to report this but going forward you will. Today we are going to talk about this subject so you will understand when your accountant brings it up.
What Do I Need to Know About This Rule Change?
As of January 1, 2016, if you sold your principal residence during the tax year, the sale must be reported on the T1 of your income tax return. Because there is a principle residence exemption in Canada, there is still no tax payable on any capital gain on the sale of your home. So in most cases it will not affect you.
Why Is CRA Doing This?
They want to improve compliance and administration of the tax system. Prior to this there were no records of buying and selling of personal residence homes in Canada for its citizens. This will allow CRA to keep track.
Who Are They Targeting With This Change?
It’s safe to say a lot of people have created wealth by owning real estate in Canada in the last 20 years. And a lot of that wealth has been created tax free. Its also safe to say a lot of people have abused the principle residence exemption during this period to make tax free gains. House flippers, home builders and international investors, to name a few, are the targets of this change. For example, in the past, a house flipper could purchase a property, live in it for a short period of time (or just claim to live there), renovate, and then sell it for a profit, tax free. They could repeat this process over and over. With the reporting of principle residences going forward, this will raise red flags at CRA and this person more than likely will not be able to do this. They are essentially trying to protect against people making “income” tax free, using the principle residence exemption.
Is There Anything Else I Should Know?
Yes. There is something called a “deemed disposition” where you don’t actually sell the property but it stops being your principle residence. Take for example, you lived in a condo as your first home and when you go to upsize to a single family house down the road, you decide to keep the condo and rent it as in investment property. When you move out of the condo, you have deemed disposition of the condo. You’ve essentially sold it at market value and bought it back at the same price. Your principle residence exemption stops on your condo after the deemed disposition and now it applies to your new single family home. This concept can get confusing sometimes.
As always, since this is a tax matter you should contact your accountant with any questions you may have. Did you sell your principle residence in 2016? We’d like to hear how your filing goes with you taxes this year.
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